Flashback: On Dec. 24, when the S&P 500 Index traded around 2,350 points, it “officially” entered a bear market … at least according to these headlines:
CNBC: We are now in a bear market.
Yahoo! Finance: S&P 500 enters a bear market.
Investors Business Daily: S&P 500 in bear market.
Sounds ridiculous, doesn’t it? But the S&P 500 SPX, +0.36% was down 20%, and according to a common definition, that marks a new bear market.
Since the December low, the S&P 500 has gained as much as 21.9%. Does that mean the bear market is over? Has a new bull market started?
The chart below shows that using an arbitrary percentage decline (such as 20%) to define a new bear market is flawed. The bear market ended right when it was “supposed” to begin.
This wasn’t the first time. In 2011 and 2016, at least one of the major U.S. indexes — S&P 500, Dow Jones Industrial Average DJIA, +0.36% Nasdaq COMP, +0.34% or Russell 2000 RUT, +0.85% — lost more than 20%, which also ended those bear markets.
I voiced my opinion about this flawed reasoning in the Dec. 19 Profit Radar Report as follows:
“ ‘Bull market’ and ‘bear market’ is a status like ‘online’ or ‘offline.’ Just because someone is offline today, doesn’t mean they can’t be online tomorrow. As any momentary snapshot status, the bull/bear market status is not predictive of future events.
“In fact, statistically, most bear markets end after the S&P 500 declines 16%. The red graph below shows the average path of the past 10 bear markets (as defined by Ned Davis Research). The S&P 500 has almost reached the maximum downside of the average bear market.”
Below is an updated version of the chart mentioned Dec. 19.
Arguing about a bear market that may or may not have existed is superfluous. Here is the more important question: Has a new bull market begun?
Technical support, and investor sentiment at the December lows (see chart below, published in the Jan. 6 Profit Radar Report) pointed toward a rally or new bull market.
The breadth thrust from the December low (discussed here: S&P 500 started 2019 with the same bullish signal as in 2009) was also bullish.
The S&P 500 has already rallied more than 20% since then (see first chart), but hasn’t been able to hang on to its recent gains. In fact, no net progress has been made since Feb. 25.
Although stocks delivered the expected gains from the December low, the structure of the rally is quite messy. I’ve been getting more conflict among indicators, and the weight of evidence is no longer clearly defined.
This is the kind of environment where anyone can find “evidence” to support his or her bias. However, in times like these investors should avoid bias-based knee-jerk reactions. Now is the time to be patient and neutral.
Instead of being a know-it-all, I admit when things are foggy. But if I had to condense all indicators into one brief outlook, it would be this:
Barring a sustained move above 2,830 points, I expect the S&P 500 to drop to at least 2,760, and ideally into the low 2,700s. If we see oversold readings and short-term sentiment extremes in that region, it may be time to put more money to work.
Simon Maierhofer is the founder of iSPYETF and publisher of the Profit Radar Report.
